Abstract: This paper studies the macroeconomic effects of the transitory Value Added Tax
(VAT) cut in the UK using a dynamic general equilibrium approach. The temporary
VAT cut policy was announced on 24 November 2008, and was due to
come into effect on 1 December 2008, with VAT reverting to its previous level as
from 1 January 2010. We quantify the effects of that temporary fiscal stimulus
policy on the key aggregate variables of the UK economy and on tax revenues.
Overall, we obtain that this policy is too temporary to have important quantitative
effects on the economy but qualitative effects are of great interest. We show
that the temporary VAT cut will generate an overshooting effect on key macroeconomic variables, and will provoke a significant reduction in investment.
Consumption and output will increase during the VAT cut, but they will decrease
below their steady state values after VAT reverts to the previous level. Our
model economy also predicts that fiscal revenues will decrease about three per
cent during the VAT cut. Finally, we find that the VAT cut policy would have provided
better results if it had been announced earlier.

From Property Companies to Real Estate Investment Trusts: The Impact of Economic and Property Factors on UK Listed Property Returns(p.19)

by V Leone

Abstract: A great deal of research has examined comovements between commercial real
estate returns and macroeconomic variables in the US economy. These relationships
have attracted less research interest for the UK real estate market, despite
this being the largest European Market. This study targets this gap in the literature
by investigating the impact of economic and property factors — e.g. the UK
IPD all property returns, the FTSE all share index returns, and the term structure
of interest rates — on listed property returns. It examines a sample of UK
property companies which converted to real estate investment trusts (REITS) following
the introduction of the UK legislation permitting this from January 2007.
By applying structural time-series modelling and the Kalman filter to obtain
unexpected changes or innovations in selected economic and property variables
it was found that economic and property variables influence commercial property
returns in the UK. Specifically, unexpected changes in the FTSE All Share
Index returns, the UK IPD All Property Returns, Industrial Production, the UK IPD
All Property Rental Growth, and the UK All Property Equivalent Yield all had a
positive impact on property returns. In contrast the term structure of interest
rates and the sterling US dollar exchange rate exerted a negative influence. It
was also found that by converting property companies into REITS their returns
quickly acquired common features of both equities and commercial property
backed assets.

Abstract: Drawing from recent advances in the classification of exchange rate regimes,
this note revisits empirically the relationship between inflation and growth
under alternative exchange rate regimes. The results, based on a panel of 125
industrialised and developing countries over the period 1980-2004, indicate
that the costs of inflation for economic growth are significant only in the case of
developing countries, and are higher for floating exchange rates than they are
under fixed or intermediate regimes.

Abstract: The world market for unbroken yearling Thoroughbred racehorses has exhibited
signs of overproduction for some years. This paper explains why, by extending
the theory of monopolistic competition to a market for a group of heterogeneous
products, ordered by quality, and characterised by perfect price discrimination.
The industry demand curve is found to be the marginal revenue curve.
The industry supply curve is shown to be downward-sloping and the absence
of barriers to entry causes suppliers to continue to produce beyond the point
which maximises the social rent. Thus intra-marginal losses are caused by a
market failure.

Abstract: The important contribution of this paper is to shed light on the validity of the taxspend
debate using panel data from 15 selected EU countries. The controversial
tax and spend, spend and tax, fiscal synchronisation and institutional separation
hypotheses compose the four theories in the field that have been formulated
to describe the relationship between government expenditures and tax revenues.
The goal of the present study is achieved through three steps. In the first
step, the entire period 1970-2007 is split into two time frames, 1970-1991 and
1992-2007, in order to take into account the pre and post-Maastricht subperiods.
In the second step, two-variable and three-variable panel models are estimated
employing the TSLS and GMM techniques. In the third step, we perform
a sensitivity analysis by conducting short-and long-run Granger causality tests
to check the robustness of TSLS and GMM results. Our empirical findings in the
case of EU countries are consistent with the theoretical framework of the fiscal
synchronisation hypothesis.

Abstract: In this paper we use a stylised three-country model to analyse how the transmission
of US shocks to Europe might be affected by Asia's choice of exchange
rate regime. We find that if Asia pegs its exchange rate to the dollar, the impact
of US shocks on European output and inflation is likely to be bigger than it otherwise
would have been. This happens because, without nominal exchange rate
flexibility, Asian firms react to the shocks originating in the United States by
implementing significant price adjustments, which in turn affect Europe's relative
competitive position. On the theoretical side, our results contribute to the literature
by suggesting that the shock insulation property of floating exchange
rates extends beyond the two countries that have currencies that are free to
move. The transmission of shocks between two countries can also be dampened
by the choice of floating exchange rates in a third country. On the practical side,
our results suggest that, if China did eventually decide to float its currency,
Europe's exposure to US shocks would decrease.

Abstract: In this paper we analyse whether the apparent comovement of unemployment
rates for some of the Central and Eastern EU new members can be explained
by a common force, possibly linked to the process of economic integration. For
this purpose we test for nonlinear unit roots as a first step to testing for common
nonlinearities. Our results show that for five countries, out of eight, unemployment
dynamics appear to be well described as a stationary process around
highly persistent structural changes. Furthermore, we find evidence of a common
nonlinear component driving the unemployment rates.

Abstract: This paper extends the literature by developing an objective market based
index, which is dynamic and continuous and can be used to measure the monetary
policy transparency for a country or, simultaneously, a series of countries.

Abstract: This paper adapts the Ethics of Spinoza into the Ramsey growth model and
shows that the way people conceive and understand life, related to emotions of
joy and sorrow, affects economic performance. The model has multiple equilibria:
The Spinoza solution — optimism — leads to greater capital accumulation,
income and consumption levels, while William James's solution — pessimism —
leads to a worse economic performance. The Ramsey model, where emotions
balance, lies in between these two solutions, showing that the neoclassical
growth model can be seen as a particular case of the Spinoza model. Finally,
regarding the relationship between emotions and economics, in the Spinoza and
William James solutions emotions and happiness are determined independently
from economic variables. Only in the Ramsey case are emotions explained by
income and consumption.

Abstract: One of the most striking features of the financial crisis that began in the autumn
of 2007 has been the associated upheaval in conventional interest rate spreads.
In the UK, this is most frequently symbolised by the widening (and increased
volatility) of the spread between 3-month Libor and the Bank of England's policy
rate. This paper uses a vector error correction model to look at the way in
which the recent crisis has affected a wide range of interest rate spreads. We
look for changes in the coefficient on the policy rate (the 'pass-through') and at
changes in the speed of adjustment to changes in the policy rate, since both are
important for policy. We find, as others have done, that the conventional behaviour
of almost all spreads is swept away after August 2007. By developing a
model which incorporates measures of counterparty and liquidity risk, we show
that market rates are now subject to additional influences but which, except for
secured loans, still incorporate the effects of changes in the policy rate much
as they did before the crisis. This contrasts with the widely-held view that the
relationship between policy and money market rates in particular has been
severely disrupted by the crisis.
For secured loans, however, there is evidence that the mark-up has risen
while at the same time the policy pass-through has fallen since August 2007.
The same applies to deposit rates, albeit to a lesser extent, with the result that
the sharp reduction in the policy rate since the end of 2007 has had a larger
effect on deposit than loan rates, the subject of widespread media comment.